Fixing LIBOR: some preliminary findings - Treasury Contents

Conclusions and recommendations


1.  The Committee concurs with the FSA's assessment of the importance of the damage done to the benchmark rates by the attempted manipulation that the regulators discovered. Attempted manipulation of these reference rates reduces trust and confidence in markets and carries costs for end users. The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets. (Paragraph 7)

2.  The Committee found Mr Diamond's attempt to subdivide the later period of wrongdoing neither relevant nor convincing. It does not appear that the conversation between Mr Tucker and Mr Diamond made a fundamental difference to Barclays' behaviour, given the repeated instances of 'low-balling' submissions to the LIBOR fixing process by Barclays set out in the FSA Final Notice covering the year running up to the phone call between Mr Tucker and Mr Diamond. (Paragraph 8)

3.  Barclays is just one of many international banks under investigation for possible market manipulation. It is important that Barclays' serious shortcomings should not be seen in isolation from the possible actions of other banks and we await the results of ongoing investigations. (Paragraph 9)

4.  It is important to state that Barclays' internal compliance department was told three times about concerns over LIBOR fixing during the period under consideration and it appears that these warnings were not passed to senior management within the bank. Statements that everything possible was done after the information came to light must be considered against a background of serious failures of the compliance function within the bank. In other words, the senior management should have known earlier and acted earlier. (Paragraph 13)

5.  Barclays received a reduction in its fine because of its high degree of co-operation with the FSA in its investigation. Barclays also disclosed wrongdoing that it had itself found to the regulators. Any such disclosure is likely to have carried serious risk of reputational damage. Co-operation with inquiries needs to be encouraged by regulators, who need to take into account first mover disadvantage, but it does not excuse or diminish wrongdoing. Nor does the fact that others may have been engaged in similar practices. The FSA and its successors should consider greater flexibility in fine levels, levying much heavier penalties on firms which fail fully to co-operate with them. The FSA needs to give high priority to its investigations into other banks, including those largely owned by the taxpayer. (Paragraph 16)

6.  Firms must be encouraged also to report to the regulator instances they find of their own misconduct. While such a firm should still be required to pay compensation to any other party who has been disadvantaged by the misconduct, in cases where a firm makes a complete admission of its own culpability the FSA should retain flexibility in setting the fine payable. The FSA should have regard to the desirability of encouraging other firms to confess their misdemeanours in a similar way. The FSA may also need to re-examine its treatment of whistleblowers, both corporate and individual, in order to provide the appropriate incentives for the reporting of wrongdoing. (Paragraph 17)

Manipulation by individuals with the intention of personal benefit

7.  The actions that have so far been discovered of Barclays and other traders were disgraceful. As the FSA's Final Notice states, the attempted manipulation of LIBOR "created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened". This attempted manipulation of LIBOR should not be dismissed as being only the behaviour of a small group of rogue traders. There was something deeply wrong with the culture of Barclays. Such behaviour would only be possible if the management of the bank turned a blind eye to the culture of the trading floor. The incentives and control systems of Barclays were so defective that they incentivised traders to benefit their own book irrespective of the impact on shareholders and the bank's overall performance. Now exposed, their actions are to the detriment of Barclays' reputation and the reputation of the industry. The standards and culture of Barclays, and banking more widely, are in a poor state. Urgent reform, by both regulators and banks, is needed to prevent such misconduct flourishing. (Paragraph 34)

8.  The attempted manipulation of Barclays' LIBOR submissions with the intention of personal gain continued for four years. It is shocking that it flourished for so long. Any system may fail for a short period, but compliance at Barclays was persistently ineffective. Even when Barclays' compliance had indications that something was awry, it failed to take the opportunity to strengthen the bank's controls. Nor was there any pressure from senior executives within Barclays to ensure that effective LIBOR controls were in place, as it was considered low-risk, in particular where LIBOR setters sat, with no presence of the compliance function. These are serious failures of governance within Barclays, for which the board is responsible. The compliance function within a bank is very important. If it is weak or ignored in the practices of the bank that is reflective of a poor culture which does not take seriously enough abiding by the rules essential to proper functioning of the bank and the wider financial system. The serious failings of the compliance function during the period under examination suggest there was this kind of culture at Barclays. (Paragraph 38)

9.  During this period of extremely weak compliance at Barclays, it was nonetheless subject to extensive regulatory oversight by the FSA. Despite the numerous ARROW visits that were conducted by the FSA during this period, we have seen no evidence that this weakness in compliance elaborated in the Final Notice was identified by the FSA in a timely manner, still less, dealt with. The FSA must report to this Committee on how it will alter its supervisory efforts to counter such weak compliance in future. (Paragraph 39)

Manipulation during the Financial Crisis

10.  Barclays has suggested that there were numerous contacts between itself and the authorities over LIBOR during this period. The clearest message appears to have been given by Barclays to the Federal Reserve Bank of New York, rather than to the UK authorities. Lord Turner described some of Barclays' contact with the FSA as "elliptic". We have found little evidence that Barclays provided the UK authorities with a clear signal about dishonesty at other firms, or its own. We await the outcome of the other regulatory investigations to see whether other firms provided such a signal, were equally elliptical or even silent on this problem. The timeline of contacts between Barclays and regulators provided to the committee by Barclays is not, of itself, evidence of a proactive approach on trying to report irregularities in the setting of LIBOR rates. (Paragraph 60)

11.  We would have expected the FSA and the Bank of England to have made efforts to identify and provide to the Committee documents clearly and directly relevant to our inquiry, subject to statutory restraints. (Paragraph 61)

12.  The financial crisis, and the serious dysfunctionality of the interbank lending markets, meant that it was difficult during this period for firms to estimate their own funding costs. LIBOR submissions were being used by markets and regulators to assess the financial health of the institutions involved. The FSA and the Bank of England were engaged in crisis management, alert to the possibility of further bank failures, rather than LIBOR manipulation. This is understandable, given the circumstances of the financial crisis, but with the advantage of hindsight constitutes a failing by the authorities. (Paragraph 62)

13.  Given the importance of LIBOR submissions in assessing banks' health, Bank of England staff were aware of the danger that banks might improperly manipulate their submissions. They noted that "banks have been subject to the more powerful incentive of avoiding stigma from being seen to submit high rates reflective of what they are actually paying". However, they primarily saw this as a matter for the regulator rather than the Bank of England. Mr Tucker told us that possible clues to dishonesty "did not set alarm bells ringing at the time". The evidence suggests that the Bank of England was aware of the incentive for banks to behave dishonestly, yet did not think that dishonesty was occurring. Nor did it appear to have asked the FSA to check to see if such dishonesty was occurring. With hindsight this suggests a naivety on the part of the Bank of England. They were certainly relatively inactive. This confirms evidence from other Treasury Committee inquiries of the dysfunctional relationship between the Bank of England and the FSA which existed at that time to the detriment of the public interest. (Paragraph 63)

14.  Unlike the Bank of England, the Financial Services Authority was the prudential regulator. Its shortcomings at this time are therefore far more serious. The Committee is concerned about the FSA's failure to appreciate the significance of market rumours relating to the artificial rigging of the LIBOR rate. We therefore look forward to the result of the FSA's internal investigation, the existence of which was disclosed in evidence to us. The Committee will want the findings of that investigation to be published. (Paragraph 64)

15.  The evidence we have received is that there was significant co-operation between the US and the UK authorities at the time of the 2008 BBA review. It is understandable that regulators, in response to the LIBOR crisis, may have placed information in the public domain to demonstrate their respective assiduity at the time. This release of information must complement co-operation between regulators. The Chancellor should stress to his counterparts the need for such co-operation at the next G20 meeting. (Paragraph 65)

16.  The BBA's review of LIBOR in 2008, given that it focussed on the concerns of the market over the LIBOR setting process, appears to have been an opportunity missed to stop the attempted manipulation that was occurring. The Wheatley review should now look at the role of the BBA in LIBOR setting at that time in detail and publish its findings. This is essential if its recommendations for a more reliable LIBOR setting process are to carry credibility. The review should include how such systems work during times of financial crisis, when there may be little or no interbank lending taking place, and how the authorities should respond to signs of dysfunction. It should also consider whether a trade association is the appropriate body to perform that role. (Paragraph 66)

17.  We have seen no explanation for the failure, both of Barclays' board and of senior executives, to question its own firm's LIBOR submissions, when its staff were complaining about the submissions of other firms, and media and academic reports questioned the incentives present in LIBOR setting. There appears to have been enough doubt being spread about the LIBOR setting process to suggest that a closer examination by Barclays board of its own practices should have taken place. It stretches credibility to suggest that Barclays was trying to alert regulators to inconsistencies in the LIBOR submissions of other banks yet had no idea about the repeated 'low-balling' of its own submissions during the financial crisis set out in the FSA Final Notice. We have found no evidence that the board of Barclays sought to conduct an investigation. This was one of a number of failings on the part of Barclays' board. Others can be found in Sections 5 and 6. (Paragraph 67)

The Tucker Diamond dialogue and the Diamond File Note

18.  The evidence we received suggests that Whitehall was prompted to contact the Bank of England because of its concerns about whether the October 2008 rescue package for the UK financial system was working, as well as concerns about the financial health of Barclays. This was understandable given the fragility of the UK and international financial system in October 2008. (Paragraph 99)

19.  We will never know the details of the discussion between the Mr Tucker and Mr Diamond. What we do know is that Mr Tucker denied ever having issued an instruction to Barclays whilst Mr Diamond denied having received an instruction from Mr Tucker. (Paragraph 101)

20.  The File note is of secondary importance as far as the subsequent transmission of the instruction is concerned. This is because Mr del Missier told us that he acted, not on the basis of the File note, but on the basis of the 29 October 2008 discussion he had with Mr Diamond, following the conversation between Mr Diamond and Mr Tucker. Mr del Missier informed us that the File note correctly records the substance of the Tucker-Diamond discussion as relayed to him by Mr Diamond, but not the exact words. There is no File note of the conversation between Mr Diamond and Mr del Missier and no recording was taken of their discussion. (Paragraph 102)

21.  It remains possible that the entire Tucker-Diamond dialogue may have been a smokescreen put up to distract our attention and that of outside commentators from the most serious issues underlying this scandal. (Paragraph 103)

22.  From Mr del Missier's evidence it appeared that Mr Dearlove was comfortable with the instruction that was passed to him following his 29 October 2008 conversation with Mr Diamond. There was some resistance from the submitter, who emailed compliance with his concerns. However, he or she ultimately acted on the instruction. There appears to have been, once again, no real 'push-back' from the compliance function when they were informed by Group treasury of the instruction. This lack of 'push back' demonstrates the weakness of the compliance function in Barclays at that time. It may also reflect the fact that Group treasury had been submitting false rates since September 2007 and that, to this end, Mr del Missier's instruction was not a departure from prevailing practice. It is unclear to the Committee why Barclays has attempted to place such weight on the Tucker-Diamond phone call given the pattern of repeated dishonesty in LIBOR submissions in the months running up to this phone call set out in the FSA Final Notice. Barclays did not need a nod, a wink or any signal from the Bank of England to lower artificially their LIBOR submissions. The bank was already well practised in doing this. Mr del Missier appears to have stressed the fact that what he saw as an instruction came from the Bank of England and that this may have muted resistance to it. Mr del Missier's evidence, that he received such an extraordinary instruction from the Bank of England, yet subsequently queried it neither with Mr Diamond nor with those to whom he passed the instruction, is not convincing. He would have known that falsifying LIBOR submissions was not permitted. (Paragraph 105)

23.  The Committee remains sceptical about the importance of the Tucker-Diamond phone call given the already established pattern of dishonest LIBOR submissions from Barclays set out in the FSA Final Notice. The lack of a record by the Bank of England of the conversation between Mr Tucker and Mr Diamond is of great concern. The fact that Mr Tucker failed to make a contemporaneous note of the conversation is explicable given that the UK was in the midst of the most serious financial crisis in modern times: there was unprecedented pressure on senior Bank of England staff at this time. Nonetheless, the Bank of England should have had adequate procedures in place for at least the making of a File note of such conversations. We recommend that the Bank undertake a review of its note keeping systems, especially those involving senior executives, and publicly report its conclusions. (Paragraph 107)

24.  If Mr Tucker, Mr Diamond and Mr del Missier are to be believed, an extraordinary, but conceivably plausible, series of misunderstandings and miscommunications occurred. The evidence that they separately gave describes a combination of circumstances which would excuse all the participants from the charge of deliberate wrongdoing. (Paragraph 108)

Barclays and the FSA

25.  We endorse Mr Diamond's view, which echoes that of the Group of Thirty, that the culture of an organisation is demonstrated by how people behave when no-one is watching. In this case, however, the culture of the Barclays allowed people to do the wrong thing quite openly over a long period, with the attempted manipulation being shouted about across the dealing room floor. Barclays was found to have fallen lamentably below the standards that the former Chief Executive suggested should be set for his own firm. (Paragraph 112)

26.  We appreciate that Mr Diamond may not have recently read the letter of September 2010 from Mr Sants to Mr Agius in connection with his appointment as Chief Executive when he appeared before us, or have had the discussions about his appointment as chief executive at the front of his mind. However, we find it difficult to accept Mr Diamond's evidence with respect to his apparent unawareness of the matters raised by the FSA with the Chairman of Barclays in connection with his appointment as chief executive in September 2010. The evidence of the Chairman of Barclays is that he did raise them with Mr Diamond, as one would expect. It seems unlikely that they were not raised with him. If they were appropriately raised, it seems unlikely that they would be quickly forgotten. (Paragraph 122)

27.  The FSA expressed concerns in connection with the appointment of Bob Diamond as chief executive to Barclays. The concerns were about an attitude to risk and a tendency to "push the limits" in areas where Mr Diamond was directly involved. The concerns were not, however, serious enough to prevent the regulator from approving his appointment. Barclays appears to have regarded the points raised by Mr Sants as "issues" rather than "concerns". On the basis of the evidence it is unclear whether Barclays 'got the message'. To avoid the scope for misunderstanding in future, we recommend that the regulator set out clearly for firms any concerns it has about a senior appointment, listing any actions that it requires. It should ensure that a response is obtained in writing from the firm, undertaking to meet each of the requirements. Failure by the firm to show evidence that the regulatory messages have been seen and acted upon should be considered a serious matter. (Paragraph 124)

28.  Mr Bailey does not recall saying that he was "specifically happy" about the tone at the top—in fact he says that the phrase "tone at the top" is Barclays' own. Mr Diamond, however, told us that the regulator was specifically pleased with his relationship with the FSA. The FSA told us that it had concerns about its relationship with the firm, but was not able to point to evidence directly linking those concerns to the behaviour of Mr Diamond. However, as Chief Executive he was responsible for the state of his firm's relationship with the regulator, and for demonstrating to the regulator that the necessary action was being taken to remedy shortcomings. The fact that the Barclays board discussed the need to get the "tone from the top" right, and how important this was to Barclays, after Mr Bailey left the board meeting, suggests that the Barclays board did appreciate his message. This appreciation was lacking in Mr Diamond's evidence. We do not accept Mr Diamond's evidence on this point. It stands in contrast to the evidence of Mr Bailey and the minutes of the discussion at the board meeting. It seems certain that Mr Bailey did express concern to the board. It is possible that Mr Diamond did not appreciate the significance of what was said. If so, this lack of appreciation could be considered part of the problem which the FSA was seeking to address. (Paragraph 134)

29.  The impression that Mr Diamond gave to the Committee as to the significance of the FSA's message to the 9 February 2012 board meeting sits uneasily with Barclays' own board minutes. Mr Bailey of the FSA has also told us that in his view the evidence from Mr Diamond to the Committee failed to convey the severity of the matters under discussion. (Paragraph 138)

30.  Lord Turner's letter to Mr Agius was described by the former as a follow up to the meeting between them which was itself a follow up to the February 2012 Barclays board, meeting at which Mr Bailey spoke. The fact that it was not described to Mr Diamond as a follow up letter to the April meeting between Lord Turner and Mr Agius is scarcely relevant. What matters is that it was part of a process of following up a board meeting which he attended and about which he was prepared to tell us virtually nothing in evidence. We accept Mr Bailey's conclusion that Mr Diamond's evidence on this point was "highly selective". We also note that Lord Turner was "surprised" at Mr Diamond's apparent ignorance of the letter. Our conclusion is that Mr Diamond's evidence was unforthcoming and highly selective on this point. (Paragraph 143)

31.  We have considered the evidence of Mr Diamond and other witnesses on Barclays' relationship with the FSA. His evidence denying that the FSA felt that trust had broken down between itself and Barclays is inconsistent with that of Mr Bailey. We are unable to accept Mr Diamond's assessment of the seriousness of the matters discussed at the February 2012 board meeting: in the light of all the circumstances, it seems to us inconceivable that Mr Diamond could have believed that the FSA was satisfied with the tone at the top of Barclays when the evidence from the FSA is that this was not the case. He did not mention the important and trenchant letter of Lord Turner to Mr Agius, setting out major concerns of the FSA, when he had ample opportunity to do so. It is very unlikely that he was unaware of that letter, or its significance as a follow up to the firm messages given to the Barclays board by Mr Bailey in February 2012.Having heard the evidence of Mr Diamond and the FSA on these points, the Committee prefers the evidence of the FSA. Select committees are entitled to expect candour and frankness from witnesses before them. Mr Diamond's evidence, in the Committee's view, fell well short of the standard that Parliament expects. (Paragraph 144)

32.  The Parliamentary Commission on Banking Standards' examination of the corporate governance of systemically important financial institutions should consider how to mitigate the risk that the leadership style of a chief executive may permit a lack of effective challenge or to the firm committing strategic mistakes. (Paragraph 155)

33.  Mr Agius denied misunderstanding the seriousness of relations with the FSA, and sought to give the impression that the February meeting was one that might be expected between a regulator and a bank. He also drew a distinction between the messages delivered by Mr Bailey in February 2012 and that from Lord Turner in April. Both of these interpretations are contested by the FSA, who said that the Bailey visit and the Turner exchanges arose from the same concerns and were part of a single process, and that the visit of Mr Bailey was quite different in character from normal regulatory exchanges. For Mr Bailey the minutes of the Barclays board were significant. He considered that the board had realised the seriousness of affairs. Yet, according to Mr Agius, the Chairman only realised it when he later met and then, in April, corresponded with Lord Turner. This looks implausible, but the senior non-executive director told the Governor of the Bank as late as 2 July that he had not, until that moment, appreciated the loss of confidence on the part of regulators in the senior executive management of Barclays. (Paragraph 157)

34.  It is at least possible that the message from the FSA's governance review may have obscured some of the messages that Mr Bailey and Lord Turner thought they were hammering home to the Barclays board. (Paragraph 158)

35.  The messages that Lord Turner and Mr Bailey gave to the Barclays board this year provide evidence of the evolution of a more judgement-led approach on the part of the FSA. Lord Turner said that the change to this approach began as long ago as 2008, and it featured in his Mansion House speech in 2009. Judgement-led regulation is welcome: the FSA has concentrated too much on ensuring narrow rule-based compliance, often leading to the collection of data of little value and to box ticking, and too little on making judgements about what will cause serious problems for consumers and the financial system. In February, though, the FSA judged that it was the overall culture, rather than just a particular behaviour, of Barclays that represented a risk, and so took steps to address this directly. This intervention was not routine or coded. It was a loud and clear expression of the concerns the FSA had about the culture at Barclays and should have been clearly understood by the board. This innovative action is also welcome. The episode shows, however, that judgement-led regulation will require the regulator to be resolutely clear about its concerns to senior figures in systemically important firms. (Paragraph 159)

The resignations

36.  Barclays' initial response to the publication of the FSA Final Notice was to announce that four senior executives would waive their bonus for one year. This proved to be a wholly inadequate response to the scale and severity of the wrongdoing discovered by the regulatory authorities. Barclays itself acknowledged that its response to the FSA Final Notice was inadequate and, as Mr Agius told us, "there was a requirement for some further action from the bank". (Paragraph 185)

37.  Both the Governor of the Bank of England and the Chairman of the FSA have stressed that they did not demand Mr Diamond's resignation, but instead pointed out the difficulties of Mr Diamond continuing in post and left the final decision to the Barclays board. However, both the Governor and Lord Turner must have been aware that it would have been extremely difficult, if not impossible, for Mr Diamond to stay in post after having lost the confidence and support of the regulatory authorities. Therefore, Mr Diamond's resignation as Barclays CEO was a fait accompli once both men intervened. (Paragraph 186)

38.  The FSA did not intervene with respect to Mr Diamond's future as Barclays CEO prior to, or on Wednesday 27 June 2012, when the FSA Final Notice was published. Indeed, the FSA only appears to have intervened on Friday 29 June, two days after the publication of the Final Notice. This perplexed Marcus Agius who told us "we went from Wednesday, [27 June] when Bob Diamond had the support of the regulators, to Monday night [2 July], when we were told in no uncertain terms that he did not have the support of the regulators". This about-turn by the FSA appears to have been the result of the vociferous public and media reaction in the days following the publication of the Final Notice. If this is indeed the case, then what many would consider the right decision was taken for the wrong reasons. (Paragraph 187)

39.  Neither the FSA or the Bank of England should intervene to remove senior bank executives to placate public, media and Parliamentary opinion. There will be circumstances in the future where they will need to act, but without the force of public opinion to support them. On other occasions the regulatory authorities will need to stand firm and not intervene despite public and political pressure for them to do so. (Paragraph 188)

40.  Lord Turner attempted to convince Marcus Agius that the Barclays board needed to give serious thought to whether Mr Diamond was the right person to lead Barclays in the future. Lord Turner appeared to come away from his discussion with Mr Agius confident that Mr Diamond would resign. However, Mr Agius then proceeded to resign himself in what we can only conclude was a last ditch attempt to keep Mr Diamond in post. Therefore, either Lord Turner's message to Mr Agius was not clear or forceful enough or Marcus Agius was deaf to Lord Turner's message. It then took the intervention of the Governor of the Bank of England before the Barclays board became convinced that Mr Diamond had to go. The Governor's involvement is difficult to justify. The Governor defends his involvement by pointing out that the Bank of England will soon have regulatory responsibility for the prudential supervision of banks. However, the Bank does not, at present, have regulatory responsibility for the banking system. Any attempt to discuss Mr Diamond's future as Barclays CEO should have come from the FSA and not the Governor of the Bank of England. The Governor's involvement is particularly surprising given that he has told the Treasury Committee in the past that he has been unable to act because the Bank did not have responsibility for this, or that, particular area of policy. Indeed, this is the very defence he and Mr Tucker have used when explaining why they did not intervene in LIBOR, despite suspecting problems. (Paragraph 189)

41.  Whatever the merits of the action taken by the Governor of the Bank of England and the Chairman of the FSA—and this Committee has sympathy with the conclusions they had drawn about the leadership of Barclays—the action they took has exposed implicit, and potentially arbitrary, power to force out senior figures in the financial services industry. The return of the 'Governor's eyebrows'—which many will welcome on this occasion—comes with the need for corporate governance safeguards. (Paragraph 190)

42.  In this case, the Governor of the Bank of England and senior FSA staff did discuss the issue and acted in concert. There was, as a result, some minimal check and balance. However, once the Bank of England assumes full responsibility for financial stability and micro-prudential supervision, even this minimal check and balance will disappear. The Governor of the Bank of England will stand all-powerful and able, by dint of raising his eyebrows, effectively to dismiss senior banking executives without discussing it with, or consulting, anyone. This is unsatisfactory. As the Treasury Committee has repeatedly stated, a much stronger governance framework is needed. Among other things this can ensure that the regulatory authorities are unable to remove senior bank executives arbitrarily or without just cause. We welcome the fact that the Chairman of the FSA agrees with us that governance processes must be put in place to ensure accountability and transparency for the process of removing senior bank executives in whom the regulators have lost confidence. (Paragraph 191)

43.  According to the Chairman of Barclays, Mr Diamond continued to enjoy strong shareholder support. If this is indeed the case, then the actions taken by the Governor and the Chairman of the FSA were in opposition to the position of major Barclays shareholders. Although Lord Turner asserts that support for Mr Diamond had fallen away over the course of the weekend of 30 June 2012, there was no strong public clamour from institutional investors for the removal of Mr Diamond. The regulatory authorities need to possess the ability to remove senior executives, but when they exercise this power, they should recognise their duty of care to shareholders. This issue should be examined by the Bank of England, the FSA and its successor bodies. (Paragraph 192)

44.  The UK Corporate Governance Code is clear that "the board should set the company's values and standards". However, the misconduct of LIBOR and breakdown of trust with the regulatory authorities has demonstrated that the Barclays board has presided over a deeply flawed culture. (Paragraph 193)


45.  The Committee regrets that the FSA's acting director of enforcement and financial crime did not take the opportunity to explain how the factors the regulator takes into account had been applied to Barclays in this case. We are concerned about the lack of transparency in the way in which the FSA calculated the amount of the fine. (Paragraph 197)

46.  The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates. (Paragraph 199)

47.  The FSA apparently believes that its fees are not raised for the purpose of prosecuting offences other than those set out in FSMA. The Committee is concerned by this. The FSA has responsibility for regulating the key participants in financial markets. The FSA's decision whether to initiate a criminal prosecution should not be influenced by the fact that its income is derived from firms which it regulates. The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives. Under section 2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case. The Committee recommends that the Government, following the Wheatley review, should consider clarifying the scope of the FSA's, and its successors', power to initiate criminal proceedings where there is serious fraudulent conduct in the context of the financial markets. (Paragraph 202)

48.  The Serious Fraud Office (SFO) is now conducting a criminal investigation into LIBOR. The Committee was surprised that neither the FSA nor the SFO saw fit to initiate a criminal investigation until after the FSA had imposed a financial penalty on Barclays. (Paragraph 206)

49.  The evidence in this case suggests that a formal and comprehensive framework needs to be put in place by the two authorities to ensure effective relations in the investigation of serious fraud in financial markets. The lead authority must be clearly identified for the purposes of an investigation, and formal minutes of meetings between the authorities must be maintained. We recommend that the Wheatley review examine whether there is a legislative gap between the responsibility of the FSA and the SFO to initiate a criminal investigation in a case of serious fraud committed in relation to the financial markets. (Paragraph 207)

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Prepared 18 August 2012